REVIEW OF BANK LENDING IN SCIENCE, TECHNOLOGY & INNOVATION CAPACITY BUILDING A Cross-Country Comparison

Cesar Yammal and Ursula Casabonne

December 8, 2005

Presentation OverviewObjective of the review and methodologyFrameworks to classify STI interventionsCountry analysisIndiaKoreaBrazilMexicoCross-country comparisonCommonalitiesDifferences in contentDifferences in methodology

Objective of the review and methodologyPurpose: To uncover successful past interventions in STI capacity building that may be applicable to new projects (WB lending as a proxy indicator for sector development)

Choice of projects:Completed major STI projectsIndustrial upgrading projectsHuman resource development projects (as they relate to STI capacity-building)Excluded from the review: agricultural research and extension, fertilizer production, environmental, and industrial pollution projects

Choice of countries:Long-standing involvement of the Bank in these sectors Technology leaders in their regions

Desk-study: Revision of project appraisal reports, project completion reports and post-completion evaluation studiesValidation of findings with experts (starting with this presentation)

Frameworks to classify STI interventionsRole of actors: STI users and producers.Nature of government intervention: demand and supply-side intervention.Types of deficiencies in the NIS that STI interventions seek to remedy: financial resources, incentives, capabilities, opportunities. Breadth of interventions: vertical and horizontal.Degrees of STI capacity: capacity to absorb and adapt existing techniques and capacity to innovate and generate STI knowledge.Carl Dahlmans K4D framework: Policy and institutional regime, education system, information infrastructure, innovation system.Sanjaya Lalls firm-centered STI framework: factor markets (skills, capital and information), supporting institutions (MSTQ system, SME support system, R&D system), incentives (macroeconomic environment, trade policy and industrial policy). Tatyana Soubbotinas national technology learning models: traditionalist slow learning, passive FDI-dependent, active FDI-dependent, autonomous, creative-isolated, and creative-cooperative.

Country analysis: India

Country analysis: IndiaSupporting selected industries to achieve higher value added.Financing of industrial subsector studies to improve the understanding of the problems facing the sector and contributing to the design of lending program in the industrial sector (cements, software, electronics, automotive).Absorption of imported technologies in selected industries (cement, petrochemicals, electronics). Technology learning component to projects: Electronics Industry Development Project 1989-1996 ($302.5 m) included a component to train electronic technicians.

Skills formation for STI absorption and adaptation: (Vocation and Technical Training projects, 1989-1999, $793 m). Funding for institutional development of Indian Institutes of Technology and Regional Engineering Colleges: Capacity expansion and modernization of laboratories: 1,100 institutions were built.Teacher training: foreign fellowships and establishment of teacher training centers.Development of curricula: establishment of curricula development centers.Focus on building linkages with industry through apprenticeship programs.Targeted to the poor: 50% of students were poor.

Country analysis: India

Building institutional capabilities of financial intermediaries for technology investments in industry

Supporting the Industrial Credit and Investment Corporation (ICICI) to build institutional capabilities (14 Industrial Credit and Investment Project loans, 1955-1987, $733m).Technical Development Fund (Industrial Technology Development Project 1989-1997, $360m) set up to provide resources for rapid import of embodied and disembodied technology (a one-stop shop for importing technologies). R&D Spread Fund (Industrial Technology Development Project 1989-1997, $360m) loans to promote industry-sponsored research at public R&D institutions and the Indian Institutes of Technology. The fund was managed by a technology-oriented unit of ICICI, which helped identifying technology institutions for the proposed projects helped to overcome information and trust barriers between researchers and business.

Financing industrial imports (e.g. 11 Industrial Imports projects, $1,330m).

Loans to the private sector to finance imported raw materials & capital goods in vital sectors of the economy (agriculture, transportation, power).

Country analysis: Korea

Country analysis: KoreaRole of government as catalyst for industry growth.

Korean Institute of Electronics Technology (KIET) built from scratch under the Electronics Technology Project 1979-1987 ($29.0 m) for wafer fabrication, semiconductor research and training of private sector personnel.

RD&E agenda set by KIETs management in consultation with industry

KIET demonstrated feasibility for semiconductor acquisition and development in Korea. In 1983, the private sector took over the semiconductor industry, rendering KIET obsolete; facility sold.

Country analysis: KoreaSupport of Technology Development Banking: (3-Technology Development Project + Financial Intermediation Project Series 1982-1997, $184 m). Financing and institutional strengthening (staff is key) of recently created Korea Technology Development Corporation (KTDC, later known as KT Banking Corporation and KT Banking Network).Evolved from joint ownership with industry and subsidized interest rates to a fully privatized entity in 1999 (50 private shareholders in 1996).Financial Products: loans, contingency loans, direct equity investment.Technical services: equipment leasing and factoring; brokerage of technology transfer and training management consultancy to SMIsCommercial criteria: technological feasibility, markets, profitability, management capabilitiesSpin-off of the Korea Technology Investment Corporation to finance technology start-ups3,000 projects supported in first 10 years in three sectors (later expanded to eight):Machinery/ metalElectric/ electronicsChemicalsSMI proportion of funding grew from 19% (1st project) to 88% (4th project).

Country analysis: KoreaRelatively late but significant support to public R&D Centers: (3-Technology Advancement Project Series 1990-1995 $108 m). Purchase of sophisticated equipment for general quality improvements of public research centers to:increase R&D activities, implement joint projects, provide quality services to industry and support MSTQ.improve graduate level teaching11 Beneficiaries (mergers and spin-offs): Genetic Engineering Center; Industrial Technology Center (ITC); Advanced Institute of Science and Technology (KAIST); Electrotechnology Research Institute, Institute of Energy and Resources; Institute of Geology, Mining and Materials; Institute of Science and Technology; Institute of Technology; Basic Science Center; Standards Research Institute; National Institute of Industrial Research.Key ingredients:clear focus on SMIs (by this time large firms are conducting their own R&D).ITC designed new products for SMIs to manufacture, helped integration with large manufacturersIntegration of support functions: design, manufacture, quality assurance, exports.industry brought into undergraduate and graduate educationPart-time teachers drawn from industryPractical work of engineering student in laboratory and industryOver 20% of students at KAIST sponsored by industryquality improvements certified by foreign accreditation agencies.

Country analysis: Brazil

Country analysis: BrazilSkills development at the vocational, technical and higher education level (Vocational Training Project, Technical Training Projects, Higher Educational Improvement Project, 1977-1990 and 2000-2005 ).Financed the hardware (buildings, equipment and institutional materials and the software (staff training, fellowships, R&D).Assisted the institutional reform of technical trainingProvided access to student loans and reform of regulatory framework of higher education.

Supporting STI (horizontal approach) (PADCT I, II, III, $304 m). PADCT I supported R&D in 6 fields: chemistry, chemical engineering, biotechnology, geosciences, mineral technology, instrumentation. (PADCT I is attributed to the takeoff of biotechnology in Brazil. Major weakness was the lack of linkages to industry.PADCT II emphasis was funding PhD and Masters students in predefined science areas.PADCT III placed greater emphasis on addressing the missing linkages between R&D institutions and firms.Technology platforms: establishment R&D consortia and partnerships to identify technology gaps in sectors. Matching funds granting facilitySectoral funds: Tax on specific industries to mobilize funds for R&D for those industries.Millennium Science Initiative: formation of research networks on strategic themes (17 Centers of Excellence). Transparent procedures for competition for awards.

Country analysis: BrazilIndustrial upgrading in industry: Transfer of technology and technology know-how to petrochemical industrial through the provision of technical advisory services by foreign engineering firms (Copesul Petrochemical Project 1979-1985, $85 m).

Supporting small and medium industries (SMIs): (Development Banking Projects 1976-1990, 605 million).Loans extended to Banco Nacional de Desenvolvimiento Economico e Social (BNDES) to support lending to small and medium industries through state and regional development banks.

Country analysis: Mexico

Country analysis: MexicoMultiple interventions for the generation, diffusion, and application of knowledge for innovation (Knowledge and Innovation Project 1998-2005, $300 m).Science and Technology ResearchCreation of a number of funds for research projects and graduate level scholarships co-financed by S&T Council and line ministries (sectoral funds) or states (mixed funds).Industry-University Linkages Restructuring of 28 public R&D CentersEquipmentEmphasis on industry orientation, increased cost recoveryMatching grants for joint industry-university projectsCreation of 24 university technology services offices, cost effective ($20 K per university), self-sustainable, evolved into a peer to peer network Enterprise Technology EnhancementTechnology Modernization Program for SMEs (across the board)Network of consultants, intermediary agentsCatalytic effect of SME Technology Evaluations on self-developed projectsRegional Technology CentersPilot Venture Capital FundUp to 20% public contribution, managed by NAFIN (a public development bank)

Cross-country comparison

Cross-country comparisonCommonalities across World Bank projectsLong term involvement, continuity (no gaps)Successful activities/ project designCatalyst of new STI areasSoftware (India)Semiconductors (Korea)Biotechnology (Brazil)STI Capacity Building BlocksDevelopment of factor markets (technical skills and capital)Development of public R&D and general higher education system. Governments drive the STI agenda

but differences in:Content Methodology

Cross-country comparisonDifferences in Content of World Bank projects

Cross-country comparisonDifferences in Methodology

T. Soubbotinas national technology learning modelsCrystal metaphorRight environment (leadership)Difficult, dynamic and slow growth process (seed, nucleus, cluster).Dimensions of crystals: STI learning capacity & STI learning opportunitiesHuman capability for STI learningMost accessible opportunities for learning from foreign sources created by capital goods imports and FDI More demanding opportunities for learning from domestic and foreign sources through domestic R&D Most demanding opportunities for learning through knowledge markets and international STI cooperation Success in using STI knowledge for improving technological structures of a countrys MVA and manufactured exports

Purpose:WB lending indicates priority given by governments to STI; and resources are devoted to develop the system, beyond basic expenditures; space do do new thingsFrameworks more or less increase in complexity as we go down.Limitations of the supply/ demand analysis, yet widely usedChoice for firm centered (vs. general research support)Choice for dynamic approach (vs., static)Role of actors: STI users and producers a couple of words for each authorKnowledge Users: Human Capital (universities, STI training and education) Absorptive capacity (follower firms)Knowledge Creators: Research capacity (universities, government laboratories, basic scientific education); Technology, Innovation and Performance (creative firms, applied R&D, process and product development)Allows to focus on the needs of the users in the system and on the feedback links between users and producers of technological innovation. Nature of government intervention: demand and supplySupply-side measures: build national capacity to produce STI knowledge, and absorb technical knowledge produced elsewhere. Demand-side measures: enhance the capabilities and/or incentive system of firms to seek technological solutions to improve their productive processes. Types of deficiencies in the NIS that STI interventions seek to remedy:Financial resourcesIncentivesCapabilitiesOpportunitiesMany STI instrument addresses different deficiencies in the innovation system, not just one. E.g.: Fiscal support for R&D addresses both financial resource and incentives. Breadth of interventions Vertical: interventions that are geared to particular firms or industries. Horizontal: where government finances and/or provides a service or regulatory framework across the economy such as funding secondary education, intellectual property rights regime, and so onThe line between vertical and horizontal interventions is very difficult to draw. There are many possible levels of selectivity, ranging from supporting the whole of manufacturing, to supporting a wide range of related activities, to supporting particular activities and particular technologies and specific types of technology or firms. Degrees of STI capacityCapacity to absorb and adapt already existing techniques, to diffuse innovation produced elsewhere and to generate improvement of acquired techniques. Capacity to innovate and generate endogenous STI knowledge.Knowledge economy framework: Policy and institutional regime Education systemInformation infrastructureInnovation system

KTDP: gets horizontal with time:First 3 prokects: metall/ machinery; electric/ electronics; chemicals4th project: expand to cover 8 sectors